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If we know that today's trend is AI, then the three best companies in this niche are TSMC, Amazon, and Alphabet. And finally, I would say When you...How old were you when you founded your company? I was 21 years old. Are you crazy— opening an investment company at 21? Maybe a little, yes. 21 years old?
Yes, yes, maybe there is a little. What inspired you to open an investment firm? I...That's a hard one to answer. I mean, I just decided I was ready for it. And looking back, I was truly ready. So, you know, for all the young people listening or present in the room: I think sometimes it's worth betting on yourself, especially in a field like investing, which is extremely democratic and where anyone can open an account.
If you also find people who trust you, you will learn something only through practice. Uh, I do n't think I could have gained the experience of the last 8 years just in theory. So, yes. What have you learned in these 8 years? And that is the same Yes. What changed you? So, the only thing I can say is: whatever your expectations are about your ability to withstand volatility— multiply them by two.
You will go through situations, whether within a portfolio or an individual position, where things are much more volatile than you expected. Therefore, your threshold for accepting volatility, even if you are confident in your thesis and have done your research well, should be extremely high. Your pain threshold, I guess, is how it could be determined.
That's it. And what have you brought us today, besides a wonderful warning? Yes. I have to start with this. Uh, past performance is no indicator of future performance . Er, this is not a recommendation to buy or sell. And so on, and so on. But today's topic is a three- stock portfolio in the style of Charlie Munger.
And it should have been just as sensational. So, yes. I think every...we...we have for you to read it in detail. I think everyone else has already read the warning. you guys who found the time, yes. your. Okay, great. That's it . Okay, I'll start with this quote. What the hell do you care if you have three securities and JP Morgan Chase has 100?
Warren always says: in a growing city, if you own shares in the three best businesses in the city, that's enough for diversification. Of course, that's true. I love this quote, and today's conversation is this quote in action. Today's conversation is not about the three companies Charlie was known for, nor the three companies he might have owned if he were still with us— this is not fan fiction .
Today's conversation is about three companies that Charlie studied, admired, and spoke extremely highly of, but which, as far as we know, he did not directly own. Although he could own two of them through a financial manager. The first company, as Charlie said, could be a great investment for someone younger who understood it better than he did.
He said about the second one that he didn't expect such success, so he doesn't regret passing it up, because it's a real natural phenomenon, and now that it's happened, it has room to grow further. And the third company, which we probably won't have time to get to, but we'll discuss it at the bar. I will say her name.
About the third company, he said that he deeply regretted the missed opportunity and was very ashamed of it, but now, of course, Buffett and Berkshire have corrected this mistake by making it a very large portion of the portfolio. All three companies are very large assets of my firm. We have owned the first company for 4 years.
Now it is a 20% position. We have owned the other two for over 7 years, and each of them occupies about 10%. A little more than ten percent, depending on the account and the day. All three of these companies have helped my firm and partnership achieve profitability of around 15% per annum after deducting fees for the past 8 years, and I am confident that they will help us continue to achieve success.
So, let's move on to the first company—this is Taiwan Semiconductor Manufacturing Company. Charlie once explained his discomfort with semiconductors this way . He said that in the semiconductor industry, you have to take all the money you earn and with each new generation of chips, you have to put all your previous profits back into it.
Of course, I hate this kind of business. But then he made an exception. He called TSMC the strongest semiconductor company on Earth and said he was very impressed with what they had achieved. And the fact that I don't like it because I'm an old person and don't want to learn new tricks doesn't mean it's not suitable for a younger person who understands it better than me.
So what could this younger person say? What the young man would have said at the very beginning is that Charlie is right about one thing: the cost continues to rise. The cost of building a 28-nanometer factory around 2010 was several billion dollars, and the cost of building a modern manufacturing facility is now about $20 billion .
But at the same time, the price of what comes out of these foundries is also going up, so the price of a 12-inch equivalent wafer at 28 nanometers was a few thousand dollars, and now the price of a 2- nanometer wafer is approaching $30,000. So the right question is the one Charlie always asked us to ask: what is the return on invested capital, and that return has remained high all this time.
So if you do some simple math, some of TSMC's most expensive manufacturing facilities in Arizona, which are the most expensive because of American construction, cost about $20 billion in terms of construction and equipment. These facilities can process about 30,000 wafers per month, and as I said, depending on whether it's 2 nanometers or 3 nanometers, the price ranges from $20,000 to $30,000 per wafer.
So, after deducting operating expenses, which are relatively minimal in this industry , you get a 25 to 30% return on capital. Thus , you get a payback period of 3 to 5 years. And what's also strange, and what Charlie missed in his claim about channeling all the profits from the past into moving to new nodes, is that he's right: you're taking all those profits from the old plants to invest in developing new nodes.
This is part of the " economic moat" because if you haven't been successful in the past, it's hard to be successful in the future. But when you launch a new node, the old nodes do not stop generating profits. The reality is that today, even as TSMC has launched 3 nanometers and is moving to 2, 5, 7, and 28 nanometers, all of these manufacturing facilities are operating at full capacity.
So, you don't reject past generations when a new one comes along. Those older generations generate profits for a long time, decades after they have recouped their initial costs and have been fully depreciated. And so you kind of stack these generations on top of each other. And when you discount the cash flows on all of these assets, this company is undervalued.
So, our first choice is TSMC. Its shares are currently trading at about 20 times earnings. Well, in terms of this year's earnings, it's somewhere around an average single-digit ratio of earnings in 5 years. Of course, you have to be conservative in your assessment. And when you compare that to the 5% yield on 10-year Treasury bonds, when they can reinvest that income at 25%, I think that's extremely attractive.
Let's move on to the next one. Actually, sorry about that. So, next. So, I'll start with Charlie's quote. Raise your hand if you're familiar with Charlie's love for Costco. Every hand must be raised. Every hand must be raised. So, Charlie said at the Daily Journal meeting in 2019, “I don’t know how to exit assets.” I don't even like looking for ways out .
I'm looking for something I can hold. Think of the satisfaction I got from watching Costco succeed. Such an absolute meritocracy, and everything is so good in them. Why would I trade this experience for a series of deals? I would be less wealthy, not more, after taxes. The second option is a much less satisfying life than rooting for the people I love and admire.
So I say: look for Costco, not the outlets. I'm here today to say: look for Amazon, not exits. And the reason is that Amazon is the digital successor to Costco, and I think it's a better business in the digital age. So, if we start with the data, Amazon's own business in the United States is bigger than Costco's business in the United States.
And if you add in the GMV from Amazon's non-profit business, Amazon is significantly larger than Costco. It's not quite double, but close to it. And even so, Costco grew by about 10% last quarter, not including changes in gas prices. Amazon grew by 15%, despite being about twice as big. People get lost in percentages, but that means they add tens and tens and tens of billions of dollars in product sales every year, even now.
And Charlie taught us to always ask " why." And if I had to answer that question, I would say two things. First, there is a huge consumer surplus. So, Amazon now delivers over 60 % of its products the same or next day in 60 of the largest cities in the United States. And so it's literally winning over wallet share, and whether consumers do it subconsciously or consciously, more and more of their weekly purchases and budgets are going to amazon.com.
The second thing is that Amazon is a brand. And that 's why 50% of US shoppers and over 90% of Prime members start their retail shopping on amazon.com. So, you know, I've always said that a brand is something you choose by default. Here's how you can prove the power of a brand. This is what a person's choice stops at.
And consumers choose amazon.com. The reason is the assortment, prices, and now also fast delivery. Costco has a great strategy: huge purchasing power for a limited list of products. Amazon has that too, but it also has an "infinite shelf," which I think is extremely valuable. You get not only selected products, but also personalized products from the “long tail”.
Previously, this could lead to analysis paralysis, but this is where AI comes to the rescue : chatbots like Rufus, with metadata about all products, significantly increase conversions because consumers can find exactly what they need. Another proof of how valuable Amazon is as a platform for finding products is the advertising business.
Advertisers know that this is a shopping destination where customer intent is extremely high, which is why they spent about $60 billion on advertising in the US last year. Costco, by comparison, spends only a few hundred million. And also to ensure fast delivery, you have another minute. Good. So I'm here to say: look for companies like Amazon, not business exits.
Okay, our third company, which we won't have time to get to, but find me at the bar—it's the Berkshire Hathaway of the tech world, the company that Munger regrets missing and Buffett has "atoned for "—is Alphabet. We can talk about return on capital, how cloud AI technologies are becoming like the airline business after deregulation, and how the most important variable is load factor.
And if that ratio drops, which everyone is worried about, Alphabet is in the strongest position for three reasons. Find me at the bar later. Now my conclusion, which is also for those who are online: below there will be a link with additional information about this case. Yes, but I'll finish this part if we all convince Tillman to let me finish, this is just a conclusion.
Perhaps. Charlie tells a story about a woman whose inheritance he helped arrange. In the 1930s, she inherited $300,000 from her father, who sold a soap company—a lot of money at the time. She invested it in five stocks, and in the 50s she died with $1.5 million. She lived modestly, paid no commissions to advisors or brokers, and of those five stocks, Charlie remembers three: Dow, DuPont, and General Electric.
And he asked her, he said, " What made you think of these companies?" "And she said, 'I thought electrical and chemical was where we were going .'" "And Charlie ends the story by saying, 'This is my kind of woman.'" "So if today's outlook, as we know it, is AI, then the three best businesses in this field are TSMC, Amazon, and Alphabet." Finally, I would say, I think Charlie once said, "If you invest Berkshire Hathaway style, you're going to sit back, the client is going to get rich, and eventually they're going to think, ' Why am I paying this guy interest a year on my wonderful passive assets?'" " So what's good for the investor isn't always good for the manager." In my firm, and I'm proud of this, for the last 8 years, since I was 21 , we have never charged a management fee.
We only charge a commission for results that exceed the profitability threshold and historical maximum. So I think I've earned the right to assume that what's good for me is also good for clients. And today I'm here to advise you to add to your portfolio, whether it's three, five, ten or twenty stocks, a share of TSMC, a share of Amazon and a share of Alphabet.
Thank you. Congratulations. Thank you for your presentation. I have two questions. Regarding TSMC, how do you deal with country risks? Because I imagine that's a pretty binary outcome for the company. Yes. Well, I mean, it's not easy. Haha . You can adjust the position size accordingly. I was looking for a hedge.
This is probably one of the few positions in my career where I was looking for a hedge. There is no perfect hedge. So , ultimately, you just have to accept it , and there are so many ways to justify it. I think Charlie said that he thought, after all these recent wars, the likelihood of invasion was low.
That is, this is a kind of justification. Looking at this year's summit, there seems to be a mutual understanding. I would say that many people talk about this risk as if it were binary. The future is a distribution of many probabilities. People don't talk about these options, which may sound unreasonable, but there are scenarios in which the US and China could allow, even in the case of annexation of Taiwan, production facilities to function almost like the Vatican, because they have enormous global influence.
So, there are so many options for the future, but as humans, we seem to cling to anything sensational. Um, and so this , this is a longer conversation. Um, and one more thing I want to add to you about TSMC, Alphabet and Amazon, I forgot to mention this due to lack of time. Together, Amazon and Alphabet own a third of Anthropic. So, I'll just add that to what was said . Thank you.
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